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How Much Should You Put Down on a House?


Deciding how much you need for a down payment on a house requires balancing liquid cash with other priorities, but COVID-19 economic conditions add a twist. Not all lenders have changed their underwriting policies, but risk reduction requirements could call for, say, larger down payments than before the pandemic.

How much should you save for a down payment on a home? Although 20% down is the rule of thumb, there is no one-size-fits-all figure.

What you put down depends on your monthly housing budget, your loan program, your cash in reserve and your plans for the home. If you expect to buy soon, here’s what you need to know.

What's a good down payment for a house?

There's no right amount to put down on a home, but there are some guidelines to consider.

First-time buyers should put down between 5% and 10%, says Joelle Spear, a financial advisor with Canby Financial Advisors in Massachusetts. The larger your down payment, the lower your monthly mortgage payment.

"Twenty percent is still a better amount if you can afford it, but if all you can afford is 3.5% or 3% down, there are opportunities," Spear says.

Specifically, you can get Federal Housing Administration loans with a 3.5% down payment. Lenders also offer conventional loan programs with 3% down, including Fannie Mae's HomeReady mortgage and Freddie Mac's Home Possible mortgage.

"There are different mortgage programs that tailor to the needs of different borrowers," says Julienne Joseph, associate director of government housing programs and member engagement, Mortgage Bankers Association. Some first-time homebuyer and government-backed mortgage programs allow you to qualify with no down payment.

The reality is many homebuyers put down much less than 20%. The median down payment in 2019 was 12% for all buyers, 6% for first-time buyers and 16% for repeat buyers, according to an April 2020 report from the National Association of Realtors.

How does COVID-19 affect mortgage down payments?

Many lenders require bigger down payments than before the health crisis, but you should also expect other changes. Some lenders use stricter criteria to approve borrowers because COVID-19 has raised the risk of default and forbearance.

You may need to verify your employment several times, as the pandemic has prompted many layoffs and furloughs. "Lenders want to see the income to support the mortgage payment," Spear says.

If you're not yet ready to buy but your income has been steady during the pandemic, you may find you can sock away more money than usual toward your down payment. "We see families saving money because they aren’t commuting, taking trips or paying for activities," Spear says.

How can you decide how much to put down on a house?

Among many factors, your finances and your goals for the home can help you choose the right down payment amount.

Questions to consider: Will the house require upgrades and updates? Are you handling a lot of other debts? How secure is your job, and has COVID-19 hurt your income?

Only you, and not lenders, can determine your ideal down payment. You can come up with that figure by giving thought to:

The monthly mortgage payments you can afford

The more money you put down, the less you have to borrow and the lower your monthly payments will be. Typically, you need to put down a lot to make a big difference because home loans are so large.

If you have flexibility with how much you can put down, run some numbers to see the difference in your monthly payment and what's best for your budget. Let's look at an example using a $250,000 home.

A 30-year fixed-rate mortgage at 4.5% interest and 3% down would result in a monthly principal and interest payment of $1,229.

Putting 5% down drops your monthly payment by only $26, but 10% down means a monthly savings of $89 compared with a 3% down payment. That can make a big difference over time.

A mortgage calculator can be a helpful tool to use for estimating a comfortable payment. Keep in mind lenders prefer your mortgage payment, plus taxes and insurance payments, to be less than 30% of your gross monthly income, Spear says.

Private mortgage insurance

If you put down less than 20% on a conventional loan, you could be on the hook for private mortgage insurance, or PMI. If you can't afford a 20% down payment, PMI may be a given.

Also, mortgage insurance is required on some government-backed loans, regardless of how much you put down.

But if you can reasonably afford to avoid PMI, you may want to do so by making a larger down payment.

Interest rate

As you increase your down payment, your interest rate may decrease because you pose less risk to your lender.

Overall, interest rates remain at record lows, regardless of the down payment you make and the loan you choose. If you can stretch to make your down payment large enough, you could score the lowest interest rate you'll likely see in your lifetime.

Closing costs

As you're deciding how much money to put down on your next home, consider your closing costs. These costs typically amount to between 2% and 5% of the house's price, and you can pay them upfront or roll them into your loan.

Paying closing costs upfront means you can't use that money for your down payment, but financing the costs will increase your monthly payment and total interest charges. You'll pay either way but need to decide what makes more sense for you.

Emergency savings

The more money you put down, the lower your monthly mortgage payment because you're financing less of the home's purchase price. But if you drain your savings account, you could set yourself up for trouble.

Homeowners should strive to keep three months of mortgage payments in a savings account, Joseph says.

"That way, if there’s an issue that needs to be repaired that is not covered by a home warranty, or if a situation arises within the context of COVID-19, you have the ability to supplement your income with savings," she says.

You'll also need to set aside a portion of your income for general home maintenance. Set aside at least 1% of your home's value annually for costs ranging from a new roof or furnace to landscaping or painting, Spear adds.

"I also recommend making sure you have three to six months of savings in an emergency fund to cover bigger-ticket items," she says.

Plans for the home

A loan program with low or no down payment can be appealing, but it puts you at risk of negative equity if your home's value decreases. That means you owe more than your home is worth, which is also known as being underwater on your mortgage.

That's not a problem if you plan to stay in the home long enough to build more equity. But this could be a problem if you need to sell your home soon after buying it.

"If you end up having to move for a job or some other reason," Spear says, "you might be forced to pay the bank money when you sell the house instead of collecting equity."

Can you get down payment assistance?

Several national and local programs can help eligible buyers get into homes, but you typically have to satisfy program requirements.

State programs, for example, might offer a second mortgage to cover a down payment and a portion of closing costs for creditworthy borrowers who meet lending requirements, Joseph says.
Some programs are available only to low-income homebuyers and may come with strings attached.

You may need to live in the home you buy for a certain amount of time, for example, before a second loan covering the down payment and the closing costs is forgiven, Joseph says. Otherwise, you'll need to repay the amount you received.

If the pandemic has allowed you to save more for your down payment, historically low rates could mean it's time to buy. In spite of COVID-19, lenders are busy, Joseph says.

"While it depends on the location, some lenders are seeing a huge influx in activity and production because people are continuing to work from home and have cut down on expenses," she says. "This has created the opportunity for some borrowers to step out into the market and engage."